What is a Dividend?
When you buy a stock, you become an owner of the company, and as the company makes a profit, you will participate in that profit in one of two ways:
- The company will pay a dividend, which you will receive. A dividend is simply the company paying some of what it earned out to you - the shareholder.
- The company will use their profits to further grow the business, and, if all goes well, you should subsequently see your stock rise in value.
If the company pays a dividend, you will see it announced on a “per share” basis. For example, in 2010 Coca-Cola Co announced a .44 cent per share dividend. This means for every share of Coca-Cola you own, you will receive an additional .44 cents.
Frequency of Dividend Payments
Dividends are normally paid quarterly, so in the case above, for every share of Coca-Cola that you owned you would receive $1.16 of dividend income per year.
To be entitled to the dividend from a stock, you must own the stock on its ex-dividend date. Below is information about the ex-dividend date and other dates you need to know about:
- Declaration date – the date the company declares their next dividend and when it will be payable.
- Ex-Dividend date –This date is set buy the stock exchanges and you must own the stock as of this date to be entitled to the dividend.
- Payable date – this is the date the dividend will be paid.
To learn more about dividend dates and how a stock price can be affected the day a dividend is paid see Ex-Dividend Dates: When Are You Entitled to Stock and Cash Dividends.
How is A Dividend Paid to You?
In some cases the dividend will be sent to you in the form of a check, or deposited into your account in cash. In other cases, you may participate in a dividend re-investment plan, in which case your dividend is used to buy more shares of stock.
Dividends for Retirement Income
Dividends can be a good source of increasing retirement income. If you look at the dividend payout history for Coca-Cola you see the dividend has steadily increased since 1962. This would have provided a source of retirement income that would have increased over the years to help your income keep pace with inflation.
To find stocks with a history of increasing dividends, look at the Dividend Aristocrats, or use one of my five favorite high dividend stock websites, which pre-screen high dividend stocks for you.
Dividend Income Funds
Rather than picking your own dividend paying stocks you can use a dividend income fund which will own many dividend paying stocks, collect the dividends and pay them out to you. I have created a list of 5 Dividend Index Funds and in the right proportion any of them would make a good addition to a retirement income portfolio.
